Microfinance in the MENA-countries: addressing societal needs and shortfalls

Authors: Triodos Investment Management

Interview

In this article Fadoua Boudiba, Senior Investment Officer for the Middle East and North Africa (MENA), shares her insights on the development of the microfinance market and how it provides a unique opportunity to change the narrative of the people in the MENA region, and the refugee crisis.

The heart of MENA

“Despite the negative news headlines and the challenging economic environment with high unemployment rates, the resilience and positivity of the population prevails. Their energy is infectious, and I feel incredibly inspired by them. Their dreams and aspirations are the same as everywhere else in the world: a life with opportunities and a good future for their children.” Boudiba is very open about the challenges faced by the MENA region. She is also equally confident about the instrumental role that microfinance can play in improving people’s lives in this region where she feels at home, being of Moroccan origin and now living in Brussels.

EUR 20 million invested to date

Triodos Investment Management has currently around EUR 20 million in assets under management in this region, in a combination of debt and equity. Key investments include microfinance institutions (MFIs) Enda tamweel in Tunisia (of which Boudiba is a board member), Vitas Jordan in Jordan, and Al Majmoua in Lebanon. Combined, they provide loans of, on average, less than USD 1,000 to around 500,000 entrepreneurial low-income people, of which 70% are women. More investments are in the pipeline.

Recognition for the role of microfinance

Microfinance in MENA has been on the rise, but at a much slower pace than in other regions of the world. Boudiba states: “There is still a huge unmet demand for finance, predominantly of women and young people.” According to the Global Findex database, 52% of all men but only 35% of all women have a bank account, the largest gender gap in any region in the world. “Since the Arab Spring of 2011, however, microfinance has gained recognition for its role in addressing societal needs and shortfalls.”

“Despite the many difficulties and with the support of MFIs, refugees have managed to set up real businesses.” Fadoua Boudiba

Providing youth with opportunities

Take, for instance, youth unemployment in MENA. The statistics are strikingly high, with close to 30% the highest in the world. Boudiba: “Young people want to participate actively and productively in their societies but are hampered by weak economies. This drives social unrest. To mitigate this issue, many MFIs have developed special loans and training programmes to support this target group and show them the opportunities and alternatives that microfinance can provide.”

Women driving the microfinance sector

About two thirds of MFI customers are women. “They typically manage small-scale enterprises. Their economic participation results in increased levels of independence and status. This changes the way women are looked upon in society and helps to mitigate some aspects of gender inequality. Despite these entrepreneurial strides, however, women are still two to three times more likely to be unemployed, so there still is a long way to go”, Boudiba says.

Viability of refugees as microfinance clients

In recent years, the MENA region has witnessed increasing refugee crises, which has had huge impact on the region’s socio-economic status. Lebanon holds an estimated 1.5 million refugees on a population of 5.9 million, meaning that of every four residents one is a Syrian refugee. Jordan, with a population of 9.9 million, hosts 1.4 million Syrians. “There’s a huge willingness to help refugees”, says Boudiba, “but at the same time, there is political pressure against the provision of microfinance to refugees because of the fear they may never return to their home country.” MFIs, from their side, are reluctant to provide loans for the opposite reason: the risk that the customer returns to his or her home country. Triodos’ investee Al Majmoua in Lebanon and Microfund for Women in Jordan, two microfinance frontrunners, have shown that providing financial services to refugees is not only feasible but also profitable. They have an almost 100% repayment rate on their refugee loans. “Despite the many difficulties and with the support of MFIs, refugees have managed to set up real businesses”, says Boudiba about Zataari refugee camp in Jordan’s fourth-largest city, where around 80,000 Syrians live. “It’s not difficult to imagine the tremendous positive impact this has”.

“I see some FinTech initiatives popping up that can make financial services faster, cheaper and more accessible.” Fadoua Boudiba

Securing the future of microfinance

Microfinance is an essential instrument to expand the levels of financial access. Although the MENA region has seen new developments in the recent years, the sector has yet to live up to its full potential. So, what is hampering microfinance to reach the wider unbanked population? According to Boudiba, liquidity is not the main issue. Rather, government regulations are the real obstacle. “Although regulatory reforms are taking place, allowing MFIs to transform as did Enda in Tunisia, as yet they may only lend to their own clients, cannot take in any savings or remittances, or the money people send home from abroad to their struggling families.” A strong legal and regulatory framework, together with the provision of specialised support services, is needed to build a stronger future for the microfinance sector.

Role of FinTech

Boudiba remains positive about the prospects of the microfinance sector. She sees an important role for financial technology (FinTech), also given the fact that among the unbanked in MENA, 86% of the male and 75% of the female population have a mobile phone. “I see some FinTech initiatives popping up that can make financial services faster, cheaper and better accessible while safeguarding the interests of the users, such as mobile e-wallets. I know there is still a long way to go, but it is really exciting to be part of these new developments and I am looking forward to a promising future for the microfinance sector in MENA”, says Boudiba. This article has been previously published on the Triodos Investment Management website. You can find it here.

Charting the path into the future of inclusive finance

Interview

Dirk Elsen, Director Emerging Markets, leads a team of almost 50 dedicated professionals and together they’re charting a course into the future of inclusive finance. “We need to broaden our focus beyond general financial inclusion to also looking more deeply at access to basic services and the role finance can play in improving them.”

Which of last year’s inclusive finance developments stand out for you?

We achieved a lot in 2017. We increased our assets under management to close to EUR 1 billion, making new exciting investments across continents. For example, an equity investment in Financiera FAMA in Nicaragua. FAMA is in the process of offering savings products in addition to its loans and financial education programmes, which we encourage. Other exciting new investments are Al Majmoua in Lebanon that focuses on serving the underserved, including refugees, and Varthana Finance, a financial institution with a focus on improving the access to quality education for children from low-income families.

What about the challenges you faced? Did they help change current or future thinking?

Political unrest and currency fluctuations had quite an impact. Take for example Uzbekistan that faced a devaluation of about 50%. Overall, investor returns in our funds have come down to levels that are lower than what we have seen in previous years, even though the underlying portfolio quality of the financial institutions we invest in overall continues to be sound. We’re strengthening how we look at currency risk and country risk. Naturally we have risk management systems and procedures in place, but we’re constantly looking at how we can further bolster them.

A client visiting one of the offices of Financiera FAMA in Nicaragua.

What about the challenges you faced? Did they help change current or future thinking?

Political unrest and currency fluctuations had quite an impact. Take for example Uzbekistan that faced a devaluation of about 50%. Overall, investor returns in our funds have come down to levels that are lower than what we have seen in previous years, even though the underlying portfolio quality of the financial institutions we invest in overall continues to be sound. We’re strengthening how we look at currency risk and country risk. Naturally we have risk management systems and procedures in place, but we’re constantly looking at how we can further bolster them.

And you have recently added a new fund?

Yes. We have taken on the management of the Sustainable Finance Real Economies Fund (SFRE) as per 1 January 2018, which invests globally in financial institutions focusing on the real economy. It has significant synergies with some of our other funds and through this we will be able to take larger stakes and make larger contributions to the capital and growth of these institutions. This is an exciting development and I am really pleased to be able to say that we have just completed our first investment in a US based community development financial institution. And there is more to come!

Some argue microfinance is dead. What’s your view? And how does it affect your strategy?

Microfinance is far from dead. Just look around the world and see how many people are excluded from finance. There’s still a lot that needs to be done, whether you call it microfinance, inclusive finance, impact investing, or development finance. I think the concept of what it means needs to be redefined. We’re looking to broaden and deepen what it means for Triodos Investment Management and have been very actively engaged in the conversation about where it is going.

“We are looking more deeply at access to basic services and the role finance can play in that.”Dirk Elsen

What do you mean by broadening and deepening the meaning of microfinance?

Broadening the boundaries of microfinance has been part of our strategic conversation for quite some time. The UN Sustainable Development Goals can be key drivers and will help us reach the world’s most important development objectives.

We are in the process of broadening our focus beyond general financial inclusion to looking more deeply at access to basic services and the role finance can play in that. We are looking at issues like low-cost housing, off-grid energy, education, health, and water and sanitation. The challenges are phenomenal. Public and donor money is never going to be enough.There’s a huge need for private capital and we are quite active in exploring what can we do practically with partners. We’re looking at what kind of new funds can increase access to these basic services in developing countries and emerging economies. We’re currently exploring a potential education fund and are active in supporting sustainable agricultural value chains too.

Is this broadening and deepening already reflected in the current portfolio?

Yes, a good example is the Avishkaar Group in India. This group of companies brings together all kinds of support propositions to strengthen small and medium-sized enterprises that contribute to development. They also own part of a prominent Indian microfinance institution, have an advisory organisation, look at investment banking to raise capital, have a series of investment funds and are exploring fintech initiatives, such as digital lending. They’re in the process of branching out beyond India, into South Asia and also Africa. We have invested in the Indian holding company, and I’m part of the Board of that holding company – it’s an exciting investment and we are very much included in the conversation.

“The impact of technology can significantly increase penetration in terms of outreach.”Dirk Elsen

In the past you’ve mentioned wanting to help drive financial innovation through financial technology. What are your plans?

We’re already working on some exciting developments. The impact of technology can significantly increase penetration in terms of outreach. It can mean significant cost savings and can be a deterrent to corruption. We’re already seeing the impact of technology in our current client portfolio, and we continue to actively engage with it.

Some time ago we made an investment in the Accion Frontier Inclusion Fund, a financial technology fund, and we are also on the advisory committee of that fund. We are by no means fintech experts but we want to help drive financial innovation through financial technology. I expect going forward, we may find ways to start investing in fintech directly.

What would you like to see change?

We could really use a little bit more help from publicly supported and donor institutions – to leverage off their limited contribution, mitigate certain risks and allow us to even raise much more capital than we’re already doing.

The President of the European Union is currently in the process of announcing a fantastic blended finance facility, but I believe you have to be certified before you can tap into it, and it’s very hard to get that certification. Development institutions and publicly supported financial institutions get the certification more easily, so the EU money flows through to them, but there needs to be an easier way to provide access to these facilities to reliable private institutions like Triodos.

We could all be far more catalytic than what we are now. We’re not looking for public money to subsidise commercial ventures, but some of the work that we do, particularly in the agricultural value chain is really high risk and we need some sort of risk mitigation, some sort of blending, because I don’t think anyone is successful in investing in relatively small-scale companies in the agricultural value chain. Unfortunately, the incentive structure of many large publicly funded development finance and donor institutions is not yet sufficiently aligned with the catalytic role they say they want to play.

Including the excluded

Author(s): Triodos Investment Management

Interview

Dirk Elsen, Director of Emerging Markets at Triodos Investment Management, introduces our vision paper on inclusive finance and discusses how the microfinance strategy has evolved to address the global challenge of serving the ‘unbanked.’

According to the World Bank, 2 billion people still lack access to financial services. How has the Emerging Markets microfinance strategy evolved to address this global challenge?

“When we entered the microfinance market in the mid 1990s, it was saturated by NGOs in all different forms. We came in as a values-driven commercial fund manager and helped open the segment to other types of funding and since, as it has gained more interest, it’s developed into a 100 billion dollar market.

Additionally, we have also emphasised that this is not only about microcredit because if you examine the need, you’ll see that credit isn’t the only source of relief. The best product to serve anyone, including the ‘underserved’ is a broad suite of financial services that can address their needs, including savings products, insurance and payment services. We have consistently been an advocate of responsible practices and a breadth of financial products.

We see microfinance institutions and banks as agents of change and as an investor, we want to play a role as a catalyst to enable these financial institutions to expand their scope to include renewable energy and sustainable agriculture.”

How do we, at Triodos Investment Management, further our contributions to the inclusive finance sector?

We can further our contributions by continuing to emphasise responsible practices. For one, executive remuneration at microfinance institutions has received more attention.

We’ve introduced a new version of our sustainability measurement system, where we assess and monitor environmental, social, and governance aspects. The governance piece brings in elements such as executive remuneration.

We also are focusing on driving scale by going beyond microfinance and expanding into the segment for small- and medium-sized enterprises. This segment, which is crucial to a country’s economy, has limited access to organised financial services and is therefore often referred to as the ‘missing middle’.

We also want to help drive financial innovation through financial technology because one of the key drivers to reaching those 2 billion people is ensuring they have access. Most do not have access to a brick and mortar location, but can access finance through technology.”

What were some of our highlights from 2015?

“In addition to growing our assets under management from around EUR 600 million to over EUR 750 million; when I look back, I think about our increase in equity investments. We now have equity positions in 25 institutions, which allow us to bring our knowledge and expertise in inclusive finance and sustainable banking to the table.

What I also find interesting is that we continue to invest across the risk and return spectrum in inclusive finance. For instance, our investment in Dawn Microfinance in Myanmar was high on the risk spectrum because it’s an equity investment in a startup organisation. But when you look at the other end of the spectrum, you’ll find our largest equity investment yet in BancoSol in Bolivia, one of the country’s two largest microfinance institutions which has grown to be one of the top microfinance banks in Latin America over the past 20 years.”

What have been some of the challenges in 2015?

“We’ve seen unprecedented volatility in the markets in which we operate and that’s clearly connected to geopolitical developments, such as the falling oil prices and the devaluation of the Russian Ruble. If you also look at currency movements, we’ve seen phenomenal devaluation in certain markets that make it very challenging to operate in. It has a big impact on the investor returns in our funds.

From all different corners, there have been challenges and between low interest environments, currency movements, and volatility, it hasn’t been easy. But through this, it has made us aware that we have to continue to manage and strengthen our country and FOREX exposures.

Considering some of the challenges, is the point – at the end of the day – to eliminate poverty?

“It’s an interesting question to ask, but we’re putting the bar too high by saying that microfinance is the silver bullet to poverty alleviation. There’s no single development that I’ve heard of that has the potential to solely lift people out of poverty. Poverty is too systemic and complicated to rely on one source of alleviation. But if you look at how we present our vision on inclusive finance, we focus on making financial services available to everyone in order to make them more resilient and to pursue avenues of life they were unable to choose.”

This article has been previously published on the Triodos Investment Management website. You can find it here.

Disclaimer

The following article has been previously published. The GBG Fund makes no proprietorial claim to content and claims no editorial responsibility. The article appears here with the kind permission of the author and the original publisher.